In This Article:
Today we'll look at Oriental Watch Holdings Limited (HKG:398) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Oriental Watch Holdings:
0.061 = HK$144m ÷ (HK$2.7b - HK$331m) (Based on the trailing twelve months to September 2019.)
So, Oriental Watch Holdings has an ROCE of 6.1%.
See our latest analysis for Oriental Watch Holdings
Does Oriental Watch Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Oriental Watch Holdings's ROCE is meaningfully below the Specialty Retail industry average of 12%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Oriental Watch Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Oriental Watch Holdings delivered an ROCE of 6.1%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how Oriental Watch Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Oriental Watch Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.